Exempt-market rules: Proposals called “game changers”

At the same time, a handful of other regulators will amend their existing OM exemptions to harmonize their rules with that aspect of the OSC’s proposals.

And several regulators also have announced plans for new exemptions that will introduce two models for equity crowdfunding.

All of these various proposals are out for comment until June 18.

The overall impact of this array of new proposals should be more avenues for companies to raise capital and a wider range of investment opportunities at the more speculative end of the market spectrum – the startups and small companies.

The exempt-market community is thrilled with the proposed expansion in exemptions, particularly the introduction of the OM exemption in Ontario. Says Craig Skauge, founder and president of the National Exempt Market Association in Calgary: “It’s a game changer.”

Skauge points out that the adoption of an OM exemption in Ontario will open up this area of the market to the overwhelming majority of investors in the province who don’t currently qualify under the accredited investor exemption.

Although it’s impossible to estimate how much pent-up demand that may represent, Skauge suggests that it’s significant. And if that turns out to be the case, this change may represent a major new opportunity for advisors as well.

Indeed, expanding opportunity is what’s driving regulators. Howard Wetston, chairman and CEO of the OSC, says that the regulator’s research in this area found that small companies are hungry for more capital and that there are some investors that want a chance to participate in this segment of the market but are thwarted by the current regulatory system.

The challenge is in addressing this apparent market failure without unduly compromising investor protection.

To that end, Wetston says, the OSC’s proposals aim to align the interests of fledgling companies and aspiring venture-capital investors while using measures such as investment limits to ensure some level of investor protection. Ultimately, he believes, this effort to open up the exempt market will be “transformational.”

Next: Uncharted waters
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Uncharted waters

The regulators are venturing into uncharted waters, particularly by introducing novel forms of financing such as crowdfunding. Wetston notes that this is one area in which the demand was coming largely from investors.

Although the crowdfunding concept has been around for some time, it has relatively little history in transactions that involve holding equity. The experimental nature of this form of financing is reflected in the regulators’ approach, too.

To start, regulators are proposing two models for crowdfunding.

Some regulators are contemplating a “startup exemption” that follows Saskatchewan’s lead in this arena. Such an exemption would be available only to non-reporting issuers and would limit firms to two offerings per year of up to $150,000 per offering. Investors, for their part, could contribute a maximum of $1,500 per offering. These offerings would have to be made through online portals, which do not have to be registered.

The other approach would allow companies to raise as much as $1.5 million per year, and limits on investors would be higher as well ($2,500 for a single investment, and up to $10,000 per year). This exemption would be available to existing reporting issuers, but the portals arranging these deals would have to be registered and adhere to certain requirements.

Currently, Quebec, Saskatchewan, Manitoba, New Brunswick and Nova Scotia are proposing to introduce both exemptions. British Columbia is pursuing the “startup” exemption only. Ontario is looking to adopt the second, higher-end exemption but not the startup option. And Alberta isn’t going to allow either model.

Given the lack of regulatory history for crowdfunding, these disparate approaches are understandable. Yet, even when it comes to the well-established OM exemption, there won’t be uniformity. The OSC’s proposed OM exemption is novel in several ways, most significantly in that it would impose limits on investors who don’t otherwise qualify as accredited investors (capping their exempt investments at either $10,000 or $30,000 per year, depending on certain factors).

Alberta, Quebec, Saskatchewan, and New Brunswick also are seeking to amend their existing OM exemptions to harmonize with the OSC’s approach. Yet, even then, differences will remain. And Skauge indicates that the existing exempt-market dealers won’t be happy with new curbs being proposed in Alberta and elsewhere.

Still, regulators have found a distinct lack of compliance in the exempt market in the past. So, although investment limits may be a blunt tool, regulators can’t be blamed for wanting to have some brake on activity in an arena in which the risks are high and, given regulators’ efforts, growth is expected to be robust.

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